Recently we have all read about the spectacular failures of corporate governance. New rules and regulations are being introduced that are intended to rebuild public trust, yet a question remains as to whether all this activity will result in boards that are more effective in delivering results.

In many firms it was the board’s lack of a strategic performance measurement process that resulted in inadequate board oversight and control that allowed improper activities to occur. Thus, addressing governance problems by proposing changes only in corporate board structures is too narrow a perspective.

This Management Accounting Guideline has been developed to advance the fields of both corporate governance and strategic performance measurement. It provides guidance for corporations on how to respond to regulatory and stakeholder concerns for improving the quality of performance of both senior managers and corporate boards of directors. It also provides significant new approaches for financial executives to contribute to improving the performance of boards of directors, CEOs, and corporations.

Responsibility for the content of this material rests solely with The Society of Management Accountants of Canada. Measuring and Improving the Performance of Corporate Boards is designed to provide accurate information in regard to the subject matter covered. This publication does not represent an official position of The Society of Management Accountants of Canada and is distributed with the understanding that the authors, editor and publisher are not rendering tax, legal, accounting or other professional services in the publication.

Recent collapses of corporations such as Enron and WorldCom have focused the attention of various stakeholders on how corporations are governed and the quality of financial disclosures and transparency of corporate decisions. The governance concerns relate to practices of both corporate boards and senior managers. The question being asked is whether the decision-making process and the decisions themselves are made in the interest of shareholders, employees, and other stakeholders or whether they are primarily in the interests of the executives. The concerns focus on whether boards of directors and senior officers are actively engaged in fulfilling their fiduciary duties and protecting and enhancing shareholder interests. They relate to both the reality and perception of board competence, diligence, and ethics and include issues such as executive compensation, board independence, board oversight, succession planning, and adequate and accurate transparency.

Though initially the problems seemed to be lodged in only a few companies, careful investigation indicated that the problems of a lack of quality corporate governance and transparency was more widespread as additional companies began disclosing lapses in corporate governance and misstatements of financial results. Regulators began to establish new governance requirements that have significant implications for boards of directors, senior managers, and financial and accounting professionals. Stock exchanges and corporations acts throughout the world began mandating improved governance and transparency among their member and listed companies. For example, the Sarbanes-Oxley Act of 2002 in the United States is already causing profound changes in corporate governance practices.

These concerns for improving both governance and transparency have also focused increased attention on the role of boards of directors in monitoring and evaluating the performance of the CEO and other senior corporate managers and the measures that should be used for those evaluations. There is also a new focus on redefining the roles and responsibilities of corporate boards of directors and CEOs and how to measure and improve the performance of corporations, their boards, and their CEOs.

This concern for the measurement of performance of boards of directors and CEOs follows recent developments that have caused companies to more carefully examine how aligned performance metrics can provide better information to measure and manage corporate performance. Information systems have been developed to provide a broader set of metrics to incorporate into new strategic management systems. And, companies recognized that they needed a better understanding of leading and lagging indicators of performance including both financial and non-financial metrics.

Though new attention has been placed on the development of improved performance measures, these have generally not been applied to senior corporate leadership including corporate boards. So, boards have not been operating with measures that permit an effective evaluation of performance by internal corporate managers, the board itself, or by external stakeholders. This lack of performance metrics has led in part to the lack of accountability of corporate boards to their various stakeholders.

This guideline is directed at three primary issues. How boards of directors can:

1) use a variety of performance metrics to improve both the evaluation and management of performance of boards of directors and individual board members;

2) use performance metrics to improve the evaluation and governance of both corporate performance and CEO performance; and

3) use performance measurement and strategic management systems for communicating the performance of boards of directors, the corporation, and the CEO to external stakeholders.

Epstein and Birchard (1999) recently introduced the centrality of measurement to improving both corporate governance and corporate transparency. Their model stresses the importance of broader measures of performance, improved management systems, improved corporate governance, and better integrated systems of internal and external reporting as a way to improve overall corporate accountability.

This guideline is directed at the leadership that is required of boards of directors and senior corporate executives to improve corporate performance and the measures, systems, and reporting that is necessary to support good governance. Strategic management systems, like the balanced scorecard, can help companies establish the drivers of good board performance and how that performance affects shareholder value. Improving board and corporate performance must include performance evaluation systems to assist in the monitoring and evaluating of corporate, CEO, board, and individual director performance.

These strategic management and performance measurement systems rely on a thorough identification of strategic objectives and key success factors. In order to identify what particular resources and systems are essential to good board performance and thus, be monitored closely, the first part of this guideline presents a discussion of the roles and responsibilities of boards of directors and of the elements leading to superior board performance.

The second part provides a carefully developed set of performance metrics for board self-evaluation, evaluation of CEOs, and for the board’s evaluation of corporate performance. It also provides guidance on the use of performance metrics to communicate the performance of boards to external constituents for evaluation. Though set in a balanced scorecard framework, the metrics and analysis of linkages can be utilized in any strategic management or performance measurement system.